What is the formula for calculating Net Present Value (NPV)?

The formula for calculating Net Present Value (NPV) is centered around assessing the present value of cash flows generated by an investment compared to the initial amount invested, or the cost of that investment. The correct formulation states that NPV equals the Present Value of future cash flows minus the Cost of Investment. This approach is critical because it evaluates the profitability of an investment by determining whether the returns (considered in present value terms) outweigh the initial expenditure.

Present Value reflects the current worth of future cash inflows, taking into account factors such as time and risk. By subtracting the investment cost, you can establish if the expected returns, when adjusted for their present value, are greater than or less than what you initially put into the investment. If the result is positive, it indicates that the investment is likely to be profitable; if negative, the investment may not be worthwhile.

The other choices do not correctly reflect the NPV calculation, as they either confuse definitions (like mixing present and future values) or do not incorporate the necessary aspects of investment return evaluation. Understanding this relationship is crucial for making informed financial decisions based on projected investment performance.